What Does Bonded Mean? Definition and How It Works

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A business is bonded if it has purchased a surety bond. Businesses may need bonds to complete many common business transactions, like applying for a license, bidding on a job, or signing a construction contract. Companies buy bonds so they can win jobs, compete with other businesses, and build a reputation as trustworthy.

Key Takeaways

• Your business is bonded if you’ve purchased a surety bond.
• A surety bond is a written guarantee that a debt will be paid or an obligation will be fulfilled.
• A primary difference between a surety bond and an insurance policy is that a bond involves three parties (the principal, obligee, and surety) and an insurance policy involves two parties (the insured and insurer).
• The principal buys a surety bond to protect the obligee in the event the principal fails to pay a debt, finish a project, or fulfill another promise to the obligee.
• You can buy a bond through an agent, broker, an online insurance marketplace or directly from a surety company.

What Is a Surety Bond?

A surety bond is a promise to assume liability for someone else’s debt or failure to fulfill an obligation. A bond involves three parties: the principal, the surety, and the obligee. The principal buys the bond from a surety to protect the obligee.

Typically, the obligee requires the bond as a condition of getting a job, obtaining a license, or signing a contract. If the principal fails to uphold its obligations, causing the obligee to lose money, the surety company will compensate the obligee for the loss.

Here’s a hypothetical example of how a surety bond works. Say one company hired a construction company to refurbish a building it owns. The construction company would buy a payment bond from a surety company to guarantee that all suppliers and subcontractors it hires for the project will be paid.

The construction company finishes the work, but fails to pay the $20,000 it owes a subcontractor. So, the surety company pays the subcontractor $20,000. Then, the construction company must compensate the surety company for the $20,000 it paid the subcontractor.

A surety bond requires the principal to reimburse the surety for any payment made to the obligee.

Bonded vs. Insured

A business is “bonded and insured” if it has purchased both a surety bond and appropriate business insurance, such as liability insurance or workers’ compensation insurance. While bonds and insurance policies are both sold by insurance companies, they are not the same. Here are some of their key differences.

Types of Bonds in Business

Many types of bonds are used in business. Here are some of the most common.

• License and permit bonds: State and local governments require businesses to buy a bond before applying for some licenses or permits. For example, businesses applying for an auto dealership license may need to purchase an auto dealer bond before submitting their application.
• Construction bonds: Also called contract bonds, construction bonds are used in the construction industry. Examples are payment bonds and bid bonds, which protect project owners if a bidding contractor is awarded a job but fails to sign a contract.
• Court bonds: Your business may need a court bond if it’s involved in litigation as a plaintiff or a defendant. For example, you’ll need to buy an appeal bond if you want to contest a court judgment against your business. The bond guarantees that if you lose the appeal, the plaintiff will receive the amount provided by the initial ruling.

How To Get Bonded

You can purchase a bond through an agent, broker, or an online insurance marketplace, or directly from a licensed surety. If you have trouble getting approved for a bond, you can apply for the Small Business Administration’s Bond Program. The SBA guarantees bonds for surety companies to enable more small businesses to qualify.

How Much Does It Cost to Be Bonded?

The amount you’ll pay for a bond depends in part on the type of bond you’re purchasing, your bond claims history, your credit score, and your company’s financial stability. A surety bond premium is a percentage of the total bond amount. Most bonds cost between 0.5% and 15% of the total amount bonded.

How Long Does Bonding Last?

Bonds last for varying amounts of time. Some last for a specified number of years while others terminate when the contract requiring the bond has ended. Some bonds continue indefinitely until the obligee notifies the surety that it no longer needs the bond because the principal has fulfilled its obligation.

What Is the Difference Between a Surety and a Guarantor?

A surety promises to compensate the obligee if the principal fails to fulfill its obligation, such as completing a job. A guarantor agrees to be responsible for someone else’s debt if the borrower fails to repay the lender. For example, Bill guarantees an auto loan his son takes out to buy a car. If the son fails to repay the loan, Bill must reimburse the lender for the unpaid debt.

Is It Hard to File a Claim Against a Contractor That Has a Surety Bond?

It is not hard to file a claim against a contractor. If a contractor you’ve hired has violated the contract, say by failing to finish the job, you should contact the surety that issued the bond and request a claim form. Submit your completed form with documentation supporting your claim to the surety. The insurer will investigate your claim and decide whether it owes you compensation.

The Bottom Line

Many businesses get bonded and insured to meet the requirements of a job. Being bonded and insured can also help businesses compete with other companies and build trust with customers and the public.

Surety bonds differ from insurance policies in many ways. For instance, bonds involve three parties but insurance policies involve only two. Bonds protect the obligee rather than the buyer, while insurance policies protect policyholders.

1. RLI Insurance. "Surety Bonds vs. Insurance Policies: What’s the Difference?"
2. Harvard University, Risk Management and Audit Services. "Surety Bonds."
3. Utah State Tax Commission. “Requirements for Obtaining a Motor Vehicle License in Utah.”
4. National Association of Surety Bond Producers. "What Are Surety Bonds?"
5. American Bar Association. "Staying Judgment with Appeal Bonds."
6. U.S. Small Business Administration. “Surety Bonds.”
7. Bond Exchange. "How Much Does a Surety Bond Cost? A Guide for Agents."
8. Viking Bond Service. "How Long Do Surety Bonds Last?"
9. Cornell Law School, Legal Information Institute. "Guarantor."
10. California Contractors State License Board. "Complaint Process Against Licensed Contractors."

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